What is a Stablecoin? Understanding the Clarity Act, Genius Act

In the dynamic and often volatile world of cryptocurrency, stablecoins have emerged as a crucial bridge between traditional finance and the innovative realm of digital assets. Designed to mitigate the wild price swings characteristic of cryptocurrencies like Bitcoin and Ethereum, stablecoins aim to maintain a stable value, typically by pegging their value to a fiat currency like the US Dollar, or to commodities like gold. This stability makes them invaluable for various purposes, from facilitating everyday transactions to serving as a safe haven during market downturns.

However, the rapid growth and increasing importance of stablecoins have also brought them under the scrutiny of regulators worldwide. Governments are grappling with how to classify and oversee these digital assets to ensure financial stability, protect consumers, and prevent illicit activities. In the United States, this regulatory push has led to significant legislative efforts, including the recent passage of key bills in the House of Representatives.

This blog post will delve into the fundamental question: What is a Stablecoin? We will explore their definition, how they work, and their critical role in the crypto ecosystem. Furthermore, we will shed light on two significant pieces of proposed legislation – the Clarity Act and the Genius Act – recently passed by the U.S. House of Representatives, which aim to provide a clearer regulatory framework for stablecoins and the broader crypto industry. Finally, we will introduce some of the top stablecoins currently dominating the digital asset market, offering a comprehensive overview of this vital segment of the cryptocurrency world.

A stablecoin is a type of cryptocurrency designed to minimize price volatility, unlike traditional cryptocurrencies such as Bitcoin or Ethereum, which can experience rapid and unpredictable price fluctuations. The primary goal of a stablecoin is to maintain a stable value, typically pegged to a stable asset or a basket of assets. This stability is achieved through various mechanisms:

Fiat-collateralized stablecoins: These are the most common type, backed by reserves of fiat currency (like USD, EUR, or GBP) held in traditional bank accounts. Examples include USDT, USDC, and BUSD. For every stablecoin issued, an equivalent amount of fiat currency is held in reserve, ensuring its value remains constant.

Commodity-collateralized stablecoins: These stablecoins are backed by physical assets such as gold or other precious metals. Their value is tied to the price of the underlying commodity.

Crypto-collateralized stablecoins: These are backed by other cryptocurrencies. To maintain stability, they are often over-collateralized, meaning a larger value of cryptocurrency is held in reserve than the stablecoins issued, to absorb price fluctuations of the underlying crypto assets.

Algorithmic stablecoins: These stablecoins do not rely on direct collateral but instead use algorithms and smart contracts to manage supply and demand, thereby maintaining price stability. This model is more complex and has faced challenges in maintaining its peg during periods of high market volatility.

Stablecoins serve several crucial functions in the crypto ecosystem. They act as a safe haven for traders during volatile market conditions, facilitate fast and low-cost international remittances, and are widely used in decentralized finance (DeFi) applications for lending, borrowing, and yield farming. Their stability makes them an essential tool for bridging the gap between the traditional financial system and the innovative world of blockchain.

The Clarity Act is a proposed piece of legislation in the United States aimed at providing regulatory clarity for cryptocurrencies. Specifically, it seeks to define when a cryptocurrency should be considered a security or a commodity, and to clarify the jurisdiction of regulatory bodies, particularly the U.S. Securities and Exchange Commission (SEC), over the digital asset space.

The primary goal of the Clarity Act is to bring much-needed legal certainty to the crypto industry. For years, crypto companies have argued that many tokens should be classified as commodities rather than securities. This distinction is critical because securities are subject to stringent regulations under securities law, which can be burdensome for decentralized projects.

If enacted, the Clarity Act would likely shift the regulatory burden for many tokens from the SEC to the Commodity Futures Trading Commission (CFTC), which generally has a lighter regulatory touch. This could make it easier for crypto platforms to offer a wider range of tokens to users without facing the same level of legal scrutiny and enforcement actions from the SEC. The bill has seen bipartisan support, indicating a broad recognition of the need for a clearer regulatory framework.

The Genius Act is another significant piece of legislation recently passed by the U.S. House of Representatives, specifically focusing on the regulation of stablecoins. This act aims to establish a comprehensive legal framework for stablecoins, particularly those pegged to the US Dollar.

The Genius Act seeks to ensure the stability and transparency of stablecoins by mandating that tokens be backed by highly liquid assets, such as the US Dollar or short-term U.S. government bonds. It also requires stablecoin issuers to publicly disclose the composition of their reserves on a monthly basis.

If signed into law, the Genius Act would bring stablecoin issuers under a clear regulatory umbrella, enhancing consumer protection and financial stability. By requiring full backing and regular audits of reserves, it aims to prevent scenarios like the collapse of algorithmic stablecoins that have caused significant market disruption in the past.

This legislation is seen as a crucial step towards integrating stablecoins more formally into the financial system, potentially paving the way for their wider adoption in mainstream commerce and finance. The bipartisan support for this bill underscores the growing consensus on the need for stablecoin regulation.

The stablecoin market is dominated by a few key players, each offering a unique approach to maintaining price stability. Here are the top 7 stablecoins by market capitalization, as of mid-2025, that are widely used and recognized in the cryptocurrency ecosystem:

Tether (USDT) is the largest and most widely used stablecoin by market capitalization. Launched in 2014, it is pegged to the US Dollar on a 1:1 basis, meaning one USDT is intended to always be worth one US Dollar. USDT is backed by a mix of reserves, including fiat currencies, cash equivalents, and other assets. It is available on numerous blockchain networks, making it highly accessible and liquid across the crypto ecosystem.

USD Coin (USDC) is another major fiat-collateralized stablecoin, also pegged to the US Dollar on a 1:1 basis. USDC is managed by Centre, a consortium founded by Circle and Coinbase. It is known for its strong regulatory compliance and transparency, with monthly attestations of its reserves published by independent accounting firms. USDC is widely adopted across DeFi protocols and centralized exchanges, making it a popular choice for traders and investors seeking a reliable stable asset.

Ethena USDe (USDe) is a relatively newer entrant that has rapidly gained traction. It is an Ethereum-based synthetic dollar protocol that aims to provide a crypto-native, censorship-resistant, and scalable stablecoin. USDe achieves its peg through a delta-hedging strategy using staked Ethereum and corresponding short perpetual futures positions. This innovative approach seeks to offer a stable asset without relying on traditional banking systems.

Dai (DAI) is a decentralized, collateral-backed stablecoin issued by the MakerDAO protocol. Unlike USDT or USDC, DAI is not directly backed by fiat currency in a bank account. Instead, its value is soft-pegged to the US Dollar and maintained through a system of collateralized debt positions (CDPs) using various cryptocurrencies as collateral. This decentralized nature makes DAI a popular choice within the DeFi ecosystem, as it offers a censorship-resistant and transparent alternative to centralized stablecoins.

First Digital USD (FDUSD) is a stablecoin issued by First Digital Labs, a Hong Kong-based trust company. It is a fully collateralized stablecoin pegged to the US Dollar on a 1:1 basis. FDUSD aims to provide a secure and transparent digital currency for various use cases, including cross-border payments, remittances, and DeFi applications. Its emergence highlights the growing competition and innovation in the stablecoin space, with new players offering alternative options for users.

PayPal USD (PYUSD) is a stablecoin issued by Paxos Trust Company and fully backed by US Dollar deposits, short-term U.S. Treasuries, and similar cash equivalents. Launched by PayPal, one of the world's largest online payment platforms, PYUSD aims to facilitate seamless transfers within the PayPal ecosystem and beyond. Its introduction by a mainstream financial giant like PayPal signifies a major step towards broader stablecoin adoption and integration into traditional finance.

TrueUSD (TUSD) is a US Dollar-pegged stablecoin that emphasizes transparency and regular attestations of its reserves. It is part of the TrustToken platform, which aims to create a suite of asset-backed tokens. TUSD is known for its legal compliance and its commitment to providing a fully collateralized and independently verified stablecoin. It is used for trading, lending, and other financial activities within the crypto space, offering another reliable option for users seeking stability.

Stablecoins are gaining popularity as a more stable alternative to volatile cryptocurrencies. Pegged to assets like the U.S. dollar or gold, they promise price stability while offering the flexibility of digital assets. However, investing in stablecoins is not without risks. Here are the most important factors you should consider before making a move.

First, understand what kind of stablecoin you're dealing with. Some are backed by fiat currencies and held in bank reserves, while others are supported by cryptocurrencies or governed by algorithms. Fiat-backed stablecoins like USDC or USDT tend to be more stable, but they rely on centralized institutions and trust in their reserves.

Second, transparency is crucial. Reliable stablecoins regularly publish audited reports that show their reserves. Lack of transparency can be a red flag, as it may signal mismanagement or insufficient backing.

Third, stay informed about regulations. In the U.S., proposed laws like the Clarity Act and Genius Act aim to bring clearer rules to stablecoin issuers. Regulatory support can enhance trust, while uncertainty may increase risk.

Fourth, consider how and where the stablecoin is used. A stablecoin with real-world use—such as being widely accepted on trading platforms, integrated into DeFi protocols, or used for cross-border payments—is more likely to retain value and liquidity.

Finally, don’t overlook platform and redemption risks. Holding stablecoins in wallets or lending protocols exposes you to smart contract bugs or security breaches. Also, check if the stablecoin can be redeemed easily for fiat or crypto, especially during market stress.

Stablecoins have undeniably become a cornerstone of the cryptocurrency ecosystem, offering a much-needed bridge between the volatile world of digital assets and the stability of traditional fiat currencies. Their ability to maintain a consistent value makes them indispensable for a wide range of applications, from facilitating efficient trading and remittances to powering the burgeoning decentralized finance (DeFi) sector.

The ongoing legislative efforts in the United States, exemplified by the Clarity Act and the Genius Act, underscore the growing recognition of stablecoins' importance and the urgent need for a clear regulatory framework. These acts, if enacted, promise to provide greater legal certainty, enhance consumer protection, and foster innovation within the digital asset space, potentially paving the way for even wider adoption of stablecoins in mainstream finance.

As the crypto market continues to mature, the role of stablecoins will only become more pronounced. Whether it's through fiat-collateralized giants like Tether and USDC, decentralized alternatives like Dai, or innovative new entrants like Ethena USDe and PayPal USD, stablecoins are set to play a pivotal role in shaping the future of finance. Understanding their mechanisms, the regulatory landscape, and the key players in this space is essential for anyone looking to navigate the evolving world of digital currencies.